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Constant-collateral pyramiding trading strategies in futures markets

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  • Stan Miles

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    Abstract

    This paper introduces constant-collateral pyramiding trading strategies, which can be implemented in the futures markets. For these strategies, expressions are derived for effective constraints on the number of futures contracts in the trader’s portfolio and on the trader’s wealth. Implications of the results are drawn regarding the degree of pyramiding adopted by a subgroup of noise traders who underestimate the probability of receiving a margin call when they engage in positive feedback strategies. Suggestions are made regarding how market regulators can use margin requirements to encourage these traders to adopt less aggressive pyramiding strategies. Copyright Swiss Society for Financial Market Research 2013

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    File URL: http://hdl.handle.net/10.1007/s11408-013-0216-7
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    Bibliographic Info

    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 27 (2013)
    Issue (Month): 4 (December)
    Pages: 381-396

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    Handle: RePEc:kap:fmktpm:v:27:y:2013:i:4:p:381-396

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    Web page: http://www.springerlink.com/link.asp?id=119763

    Related research

    Keywords: Noise trading; Feedback trading; Margin-setting methodology; Constant-collateral pyramiding trading strategies; G11; G18;

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    1. Harrison Hong & Jeremy C. Stein, 2003. "Simple Forecasts and Paradigm Shifts," NBER Working Papers 10013, National Bureau of Economic Research, Inc.
    2. Vila, Jean-Luc & Zariphopoulou, Thaleia, 1997. "Optimal Consumption and Portfolio Choice with Borrowing Constraints," Journal of Economic Theory, Elsevier, vol. 77(2), pages 402-431, December.
    3. Carlos A. Ulibarri & Peter C. Anselmo & Karen Hovespian & Jacob Tolk & Ionut Florescu, 2009. "'Noise-trader risk' and Bayesian market making in FX derivatives: rolling loaded dice?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 268-279.
    4. Hardouvelis, Gikas A & Kim, Dongcheol, 1995. "Margin Requirements, Price Fluctuations, and Market Participation in Metal Futures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 659-71, August.
    5. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 127-151, June.
    6. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
    7. Grossman, Sanford J. & Vila, Jean-Luc, 1992. "Optimal Dynamic Trading with Leverage Constraints," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 151-168, June.
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